Withdrawals - Are You Guyz Really Sure????
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Withdrawals - Are You Guyz Really Sure???? Mark Bolter asks a question that is still confusing
to a lot of clubs.
My club has
gone round and round on the following issue: Assuming we transfer an appreciated
stock to a member who is leaving the club, isn't it possible that he could get
saddled with a large capital gains? In a scenario, a member has invested
$3,000 in the club over a period of time and over the course of a his time in
the club, the current market value of his contributions is $5,000. If
the remaining club members wish to pay the member by transferring a stock, what
precludes them from transferring Stock A with a cost basis of $1,000 and a
market value of $5,000. Therefore the withdrawing member would receive a
security worth his market value of $5,000 but in the event of selling the stock
to raise cash, the member would be face with paying taxes on a gain of $4,000.
Are we missing something? Please Help!
The detail that you
are missing is the fact that the member's basis in the distributed stock becomes
his basis for his entire partnership interest, less any cash received. In your
scenario, your member has contributed $3,000 over time. Let's assume that he/she
has not been allocated any K-1 items that would affect the tax basis for the
partnership interest. Hence the basis of the entire interest is $3,000. Since no
cash was distributed, the basis for the distributed stock becomes $3,000. If the
stock were to be sold immediately after the distribution, there would be a
gain of $2,000 to report [Sales of $5,000, less cost of $3,000]. Note that this
is the same amount of gain that would have been reported if the member had
received $5,000 in cash [$5,000 minus $3,000]. That's why we say that the member
is no worse off receiving stock in a complete termination of interest, and may
be better off because the time of recognition of gain can be deferred until the
stock is actually sold. The club postpones the $4,000 gain that they would have
to recognize if the stock were sold by the club in order to pay off the member.
As we often say, it's a win/win situation.
My colleague, Jerry Dressel has written a definitive
treatise on this subject that can be found at
Member Withdrawals - payout options for your club.
http://www.bivio.com/trez_talk/mail-msg?t=2984700003 Thank you for submitting a question that is of concern to a lot of investment club members. Please come on back, if you have more questions. |
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